The Supreme Court on Wednesday upheld the validity of states imposing additional sales tax or surcharge calculated as a percentage of the existing sales tax, holding that a 1974 Constitution Bench ruling on the issue continues to remain binding.
A seven-judge Constitution Bench headed by Chief Justice of India Surya Kant unanimously held that a reference seeking reconsideration of the legal position had become academic following amendments to the laws in question and the introduction of the Goods and Services Tax (GST) regime in 2017.
“The question referred to is of no practical significance and now academic. Consequently, the question referred to does not survive for adjudication by a seven-judge Bench, and the reference has to be answered accordingly,” the CJI said in a judgment written on behalf of himself and five other judges.
Justice K V Viswanathan delivered a separate concurring opinion. The other members of the bench were Justices S V Bhatti, Joymalya Bagchi, N V Anjaria, Arun Palli and V Mohana.
While declining to reconsider the issue, the court clarified that its five-judge Constitution Bench ruling in S Kodar vs State of Kerala (1974) continues to hold the field.
In that judgment, the court had upheld the validity of additional sales tax, ruling that a levy calculated as a percentage of the sales tax payable amounted to an enhancement of the sales tax rate and not a tax on the income of dealers.
“We have clarified that the case clearly held that an additional tax or surcharge computed as a percentage of the sales tax payable is an enhancement of the rate of sales tax and a tax on the sale or purchase of goods within Entry 54 of List II, as it then stood. That decision continues to hold the field,” the CJI said.
The court further clarified that the legislative competence of state governments to impose such a surcharge would continue to be governed by the principles laid down in the 1974 judgment.
The reference arose from a challenge to Section 5A of the Orissa Sales Tax Act, 1947, which imposed additional tax at 10 per cent on dealers with an annual turnover between Rs 10 lakh and Rs 1 crore, and 15 per cent on those with a turnover exceeding Rs 1 crore.
The appellants had questioned whether the state legislature was empowered to impose such a levy under Entry 54 of List II of the Constitution, which deals with taxation on the sale or purchase of goods, or whether it amounted to a tax on income, a subject under Parliament's domain through Entry 82 of List I.
The issue stemmed from differing interpretations in earlier Supreme Court rulings. In S Kodar vs State of Kerala, a five-judge bench had held that an additional levy linked to the sales tax payable was an enhancement of the sales tax rate and not a tax on dealers' income.
During the hearing on September 22, Solicitor General Tushar Mehta had argued that the dispute had largely become academic after the introduction of GST in 2017, with only a few related cases remaining pending.
The detailed judgment is awaited.